Category: Markets

What are the growth-linked bonds that Greece is proposing?

  • Exchange existing European rescue loans for new bonds linked to future GDP growth - Bosnia, Bulgaria, Costa Rica & Mexico have issued similar instruments in the past.
  • Downside protection for Greece - pay more to creditors when economy does well, and less when economy slows, so good risk-sharing solution.
  • But problem insofar as imply more flexibility from creditors (but better than outright default), and also might result in Greece fudging GDP numbers.

Dangers of strong US$?

  • Big structural currency shifts are never a good thing.
  • Political ramifications - might make Trans Pacific Trade Partnership harder to sign off this year.
  • Bad for exporters + bad for companies with overseas operations (e.g. 47% of revenues of S&P500 companies generated abroad, so negative impact on their earnings).

Why is US$ likely to remain strong in medium-term?

  • US growth solid compared to weakness in rest of world.
  • US bond yields higher than rest of developed world.
  • Latter will become more pronounced as Fed raises rates while rest of world cuts.

Summarise Greece’s position vis-a-vis creditors?

  • New Finance Minister defiant yet new PM (Tsipras) seems more pragmatic, saying no unilateral action will be taken.
  • Government initially stated it will no longer co-operate with the international lenders (i.e. IMF + ECB + EC) that oversaw bailout program, and will ignore the bailout terms (by reversing reforms).
  • Tsipras walking tightrope between electoral promises (to renegotiate Greece's debt) and promises to creditors.

Where does Italy’s PM Renzi stand vis-a-vis austerity?

  • In speeches is anti austerity + praises Draghinomics (i.e. stimulus via increased government spending).
  • Remains popular and has positioned himself as a rebel working within the system.
  • Walking tightrope of nudging his left-wing Democratic Party towards the right, while simultaneously urging the EU to give Italy more budget flexibility.

Why is the new Syriza (far left) government in Greece a concern?

  • New PM is anti-austerity and wants to renegotiate Greece's debts.
  • Ending austerity would cause ballooning budget deficit, Greece would have to leave the EU (as members need to adhere to certain budget rules), and could face deep economic crisis (like the situation Venezuela is in right now).
  • Debt renegotiation effectively means Greece reneges on past commitments to creditors, so would effectively lose future access to international capital (situation Argentina is in right now).

Brazil macroeconomic snapshot?

  • Not good.
  • Slow growth (< 1% this year), negative trade balance (first time in 14 years) + lack of investor confidence.
  • Budget deficit, massive public debt + major drought.

Why is Venezuela’s economy such a mess?

  • Years of massive government overspending under Chavez (budget deficit of over 17% of GDP).
  • Even though oil price was high then, government spending was way beyond its means - this unsustainable system remains in place.
  • Now that oil price has fallen, entire economy is out of control, but China keeps lending money (in exchange for oil) which has masked the need for urgent reform.

Likely impact on Swiss economy of abandoned currency cap, assuming currency remains high?

  • Tourism and exporters will suffer.
  • Companies with high costs that they can't move out of Switzerland (healthcare, banking) will suffer.
  • But Swiss central bank believed they would have had to abandon the peg anyway once the ECB started QE.

Why did Switzerland ditch their currency cap?

  • Because ECB is about to embark on QE (a massive bond buying program) which will send euro interest rates lower and create an increase in demand for Swiss francs (as they will pay relatively higher interest).
  • So there would be big upward pressure on the franc, which, if the currency cap remained in place, the Swiss central bank would have to neutralise by meeting that demand (i.e. buying euros and selling francs).
  • It could eventually start running out of francs, and therefore be forced to abandon the peg anyway.
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